In Defense of Compassionate Capitalism
Business exec and and musician D.A. Wallach wrote an essay on Medium the other day called “When Mother Teresa Drives a Ferrari: Why Compassionate Capitalism is Kind of a Scam.”
In it, he argues that compassionate capitalism is not a viable path and that the worlds of business and social good should be separate. He specifically points out the inequity of the one-for-one model popularized by TOMS shoes, which he believes exploits the poor in order to sell more commercial products. At the end of his essay, he invites the public to post their rebuttal. Here’s mine.
Don’t Throw the Baby Out with the Bathwater
I think the first problem with Wallach’s argument that “compassionate capitalism is a scam” is that he throws the baby out with the bathwater. Wallach takes issue with the TOMS model, but from this narrow starting point, he then argues that all compassionate capitalism is bad. Irrespective of the merits of the one-for-one model, the jump from “TOMS is bad” to “all compassionate capitalism is bad” is a big leap and unfairly reduces the entire compassionate capitalism movement to a single shoe retailer.
As someone who has run a for-profit, social venture for the last seven years where the societal good is baked directly into the product, I can assure you that the TOMS one-for-one model does not represent the entirety of the compassionate capitalism movement. In my opinion, the best social ventures, those like Kickstarter and GiveForward, bake societal good right into the product rather than tacking it on. While Wallach may have some legitimate concerns with the TOMS model, throwing the baby out with the bathwater is not the solution.
Profit and Societal Good are Not Mutually Exclusive. This is a False Dichotomy We Should Reject.
In rejecting compassionate capitalism, Wallach argues for a future where we celebrate the “baldly ambitious capitalists” rather than the “confused philanthro-entrepreneurs ” — a future where social justice is exclusively the domain of do-gooders working at non-profits, and making money is exclusively the domain of the “rapacious business person.”
For example, in Wallach’s world:
If you start an oil company that poisons the earth for future generations you should be celebrated for your baldly ambitious thirst for wealth. Well done, sir! Enjoy your G6.
Or what if you start a candy company that uses child slaves in Africa to pick the cacao so you can sell a Snickers for just 99 cents? High-five for you, you savvy capitalist. That’s a great comparative advantage you’ve discovered!
But if you start a shoe company like TOMS that donates a pair of shoes to an impoverished child for every pair of shoes purchased? Whoa, whoa, whoa. Hold up, there, you wolf in sheep’s clothing!!! You’ve just crossed a serious ethical boundary.
How does this make any sense?
If we take Wallach’s argument to its logical conclusion we are accepting a society where doctors, nurses, fireman and teachers deserve to live in poverty because they choose to help others, while those who work in fields that yield no societal benefits (think high frequency traders) deserve to profit off of others simply because they are explicit and open about their profit motives. This is not a world in which I would like to live.
Who Has the Right to Drive the Ferrari?
To make his point that doing good and doing well are contradictory in nature, Wallach asks the rhetorical question:
“What if Mother Teresa drove a Ferrari? You’d be bothered, right?”
My answer to that is a resounding no. If Mother Teresa is generating an abundance of societal good in the world, then let her drive as many Ferraris as she wants.
Getting bothered by Mother Teresa driving a Ferrari is about as logical as a CEO telling her top salesperson to stop making so many sales because it’s not fair he’s personally getting rich from his commissions. If the salesperson is creating an abundance of enterprise value for the company, give him the Ferrari. If Mother Teresa is creating an abundance of value for society, she deserves the Ferrari too.
And you know what? The reality is that the Mother Teresas of the world already do drive Ferraris — They have for a long time. They’re called doctors and they are the ones who save people’s lives on a daily basis. They possess a scarce set of skills and create an immense amount of societal good. Because of this, the average pediatrician earns $173,000 a year. And yes, I’m sure that some of them do, in fact, drive Ferraris.
Is that okay? I think it is.
If, as a society, we can largely agree that it’s okay for a pediatrician to earn $173,000 a year in exchange for all the value she creates in society, why should we be uncomfortable if a twenty-one-year-old social entrepreneur does the same?
The only major difference between the doctor and the social entrepreneur is scale.
For instance, let’s say a surgeon can perform 100 life-saving surgeries per year and earns $7000 per surgery for a total of $700,000 per year. The limiting factor of her earning potential is her ability to scale. But what if she figured out a new technology that allowed her to perform 1000 life-saving surgeries per year instead of 100, and she was able to do them at half the cost? As a society, we would all benefit from this technological advancement. She would save 10X as many lives at half the cost to the consumer. In exchange, she would earn $3.5million a year for her work. Everyone in this situation is better off.
This is EXACTLY what compassionate capitalists do. They tackle the world’s biggest problems, like healthcare, hunger and global warming, and they use technology to figure out how to solve these problems at scale.
Elizabeth Holmes is a prime example. Holmes is the 31-year-old founder of Theranos, a blood testing company based out of California. After her uncle died of cancer that was caught too late, Holmes dropped out of Stanford in 2003 determined to find a way to detect diseases earlier. Fueled by her passion to improve the world, she developed a way to test a drop of blood at a fraction of the price of commercial labs. According to Forbes, the Theranos process is faster, cheaper and less painful than traditional blood tests and can run up to seventy screens at the same time. Holmes’ ingenuity will help save millions of lives and has already created an immense amount of societal good. Today her company is worth $9 Billion and she is the world’s youngest self-made woman billionaire with a networth of $4.5 Billion
THIS is compassionate capitalism at it’s finest. This is a formula that works.
As Dan Pallotta eloquently explained in his 2013 TED talk, the existing non-profit model — the Wallach model, is dead. The Holmes model is the model of the future.
My Own Experience With Compassionate Capitalism
Having started one of the first startups in Chicago to have success with a compassionate capitalism model, my co-founder, Desiree Vargas Wrigley and I have faced a continuous uphill battle trying to convince the D.A. Wallachs of the world that this new paradigm works. In the early years, it was the old-school VCs who would often say things like “I love everything about your business, but there’s just one thing I can’t get behind. It feels like you should be, you know, a non-profit or something.”
They couldn’t wrap their heads around this new world where black and white is not clearly delineated. To be fair, it wasn’t exclusively Chicago VCs, it was almost all VCs. The idea of a for-profit business that did good simply made their heads explode.
In fact, in 2012 when we were raising our Series A, this issue became such a deal breaker with so many VCs that eventually we decided to get the question out of the way before we’d even open our deck.
We would start pitch meetings by saying:
“Before we go any further, how do you feel about investing in a company that is going to do a ton of good in this world and is also going to make you a ton of money?”
When we pitched Phin Barnes and Josh Kopelman at First Round Capital, Josh responded “Are you asking if you need to add gambling to make us interested?”
Of course, Josh was joking.
The forward thinking VCs, like Josh and Phin at First Round Capital, Eric Paley at Founder Collective and Matt McCall at Pritzker VC — they got it. They understood that the world was changing and that for-profit businesses could both do good and do well at the same time.
Fortunately for us, they all decided to invest. And because of that, today we have helped save thousands of lives and kept tens of thousands of families out of medical bankruptcy. To me, this is an unqualified and resounding win for compassionate capitalism. There’s simply no way we could ever have done what we are doing as a 501(c)(3) non-profit. Our company could not have scaled. Families would have gone bankrupt. People would have died. And this, in my opinion, is why D.A. Wallach is wrong.